AuthorTopic: A CFA question from the 1994 study guide
shaz007
@2004-10-28 09:36:18
Hi,
This question is from a 1994 Level 1 CFA Study Guide-

Briefly explain whether investors should expect a higher return from holding Portfolio A versus portfolio B under capital assest pricing theory(CAPM).
Assume that both portfolios are fully diversified.
Portfolio A-
Systemic (Beta) 1.0
Specific risk each individuial security- High.

Portfolio B-
Systemic (Beta) 1.0
Specific risk eah individual security-Low.

Could some one please give me the answer (like i know its Portfolio A- but why) or tell me if there is any where on the net where there are old study guide CFA answers.
Thanks so much!!!
Sharon :)
Matt
@2004-11-01 00:17:14
The systematic risk is the risk associated with the overall market in general. The non-systematic risk is unique to each individual security and is a function of the risk inherent in the business model / operations / industry. The total beta is a function of both the systematic and non-systematic risk of the security or portfolio. Therefore, higer non-systematic risk will increase the total beta of the portfolio, increasing the volatility and the required return.
CAPM = Risk-free rate + Beta*(Market risk premium + Risk-free rate). Don't know if this is a good explanation but getting a grasp on the different elements of Beta may be helpful.

CFA Discussion Topic: A CFA question from the 1994 study guide

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Your review questions and global ranking system were so helpful.
Lina

Lina